Amazon Buying Netflix? Rumors Swirl Again, but It's an Unlikely Deal

Some rumors never die on Wall Street. And an acquisition of Web-based video rental company Netflix (NFLX) by Amazon.com (AMZN) is one of them. Talk of a linkup-in-the-making circulated again on Tuesday, leading to heavy volume in January call options for Netflix shares. But unlike the merger speculation last summer that led to a 6% spike in Netflix shares, the stock remained virtually unchanged during afternoon trading Tuesday. The market seems more skeptical of the chatter this time around -- and for good reason.On some levels, of course, Netflix seems like a good fit for Amazon. Both companies are in the business of getting customers the DVDs they want through rentals and sales, respectively. Moreover, both are betting that the video business will transition to online distributions in some measure and are building out their video-streaming services. And Netflix is well ahead of Amazon by most accounts, making it a potentially juicy target for its gargantuan rival.

But there are also big barriers to the deal. The most important may be the uncertainty surrounding Netflix's business model as the company attempts to transition from a physical, mail-based distribution system to a digital model. As the physical DVD business slows, making the jump would offer huge advantages to Netflix. It costs the company 80 cents to mail a DVD, but streaming it costs only about a nickel, for example.
Netflix Faces a Fight with Hollywood

Getting Hollywood studios to hand over the digital rights for movies early on, though, remains a major obstacle. Despite their dwindling popularity, sales of DVDs remain a high-margin cash cow for Hollywood, and studios have setup a massively complicated system of release schedules to squeeze out maximum profits from each film.

As he attempts to renegotiate this longstanding setup with Hollywood's giants, Netflix CEO Reed Hastings has been surprisingly candid about the challenges facing his company. "Almost no companies succeed at what we're doing," he told The Wall Street Journalover the summer.

A merger that gave it access to Amazon's heft could help Netflix, but the Web giant may be more inclined to watch how things play out instead. Amazon made a big push into Web services a few years ago when it launched its Unbox movie-streaming service, along with remote-storage and computing services.

But as those services slowly gain traction, Amazon seems to be turning more of its attention to buying companies that can fit in with its core retail operations. In July, for example, it bought online shoe retailer Zappos.com for about $900 million.

While Netflix solidifies its new business model and Amazon buys close to home, investors looking for a reason to purchase shares of Netflix should put an impending deal between the two at the bottom of their lists.